ACG Research on Huawei, Chinese business culture and the Art of War

ACG Research researched Huawei and Chinese business culture for months to shed light on the vendor’s go-to-market strategy and why global telecom carriers and network equipment vendors need to understand the Art of War.

It wasn’t long ago that the telecom industry stumbled over how to pronounce Huawei (yes, that’s hua wey in English), while dismissing it as the low-priced Chinese telecom equipment provider. Now the telecom equipment industry is getting jittery as Huawei wins deals one by one, no matter how small. Huawei has Chinese government backing and access to an enormous amount of capital to help service providers finance equipment. Then there’s its not-so-public interest in the enterprise networking market.

So many unknowns surround this privately held company that ACG Research spent months researching Huawei to separate folklore from reality,interviewing dozens of global telecom carriers and industry consultants in different countries about how Huawei structures its equipment and solutions deals. The goal was to figure out who Huawei really is, its short- and long-term strategies and whether vendors’ increasing anxiety over Huawei’s place in the equipment market is well-founded.

People make the mistake of thinking Huawei is a low-margin company, and it’s not. That’s the Art of War.
Ray MotaManaging Partner, ACG Research

ACG Founder and Managing Director Ray Mota talked to SearchTelecom.com Executive Editor Kate Gerwig about how Huawei’s strategy is right out of The Art of War, the definitive sixth century Chinese military treatise that advocated quick and appropriate responses to changing conditions along with deception-based warfare. In part one of the Q&A, Mota talks about Chinese business culture and what makes Huawei a tough competitor. In part two, Huawei vs. network equipment vendors, Mota talks about Huawei’s enterprise networking aspirations and how it positions itself with service providers compared to Western vendors.

What was the motivation behind doing such exhaustive research on Huawei?

Ray Mota: If you look at reports from the analyst and consulting community, Huawei is the only vendor out there with a delta ranging from 40% to 100% differences on its share of various market segments, particularly carrier routing and switching. That doesn’t happen with other vendors. Sometimes the numbers Huawei provides are somewhat inflated, so the differences come from total estimates because Huawei hasn’t always been able to back up its claims. We wanted to know what’s going on and the threats for other telecom equipment vendors in terms of Huawei’s go-to-market strategy. The other issue is that there are so many folktales about Huawei. I’ll hear that Huawei has 50,000 working at one carrier and 10,000 at another. We wanted to clear up the smoke.

How did you find out what’s going on?

Mota: We couldn’t look at everything, but we looked at six countries -- China, India, Brazil, the U.S., the U.K. and Germany -- where we were able to work with local consultants who had good pulses on the carrier side to give us that insight. We talked to more than 40 carriers, and we got tremendous clarification. But at the same time, some things popped up that I wasn’t expecting.

What surprised you about Huawei?

Mota: The first thing is how aggressive Huawei’s strategy is to try to beat Cisco, and not just in the short term. It literally has a 15-20 year plan to penetrate North America, and Huawei is very patient. Then there’s government help and available capital. What you have to understand about China in general is that any company that earns more than a certain amount of revenue gets money from the government to help fund international installations and is encouraged to expand.

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Then you see that in North America, Huawei is taking advantage of some of the economic implosion that’s going on. It goes into small cities where there’s high job loss and puts in factories. Some of these factories are actually Chinese-owned, and in the U.S. what tends to happen is that for every 10 employees hired, the company gets a $1,700 tax credit from the U.S. government for creating additional employment. So those are some of the dynamics going on. A few years ago, revenue of Chinese companies in the U.S. was about $500 million; last year it was $5 billion.

Is Huawei run differently than companies in North America?

Mota: In China, when you get hired by a company, you are hired for the good of China first. You get hired for the good of that company second. And number three is for the good of yourself. It’s literally the opposite when you get hired in the U.S. So in essence, companies here are competing with all of China. That’s the concept.

Does that make a difference in how deals are structured?

Mota: It’s a wolf-pack mentality. Even the way Huawei structures deals is more for the good of the country than for the good of Huawei. The reality is that if Juniper, Cisco or Alcatel-Lucent are working on a deal, there may be optical, mobile and security pieces. In the U.S., we have individual line-of-business managers arguing with each other about where they’re going to compromise on profit margin. Huawei doesn’t do that. Huawei looks at it holistically in sort of an Art of War type strategy. And because Huawei isn’t a public company, it can structure deals and contracts in ways that public companies can’t.

Does Huawei employ other Art of War strategies?

Mota: One of the concepts is to surround the perimeter and attack. So executives at some companies might say Huawei’s MPLS solutions are bad. That’s exactly what Huawei wants them to think because they don’t want our vendors to worry about them.

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